The insurance markets in the GCC countries are generally still profitable although the trend of decreasing profitability continued throughout 2018, according to S&P. In an assessment of listed insurance companies across the GCC, insurers’ profitability, excluding the UAE, has been on a downward trend since 2015, the S&P report said. Saudi Arabia fared the worst, recording a profitability of about $380m in 2017 compared to about $580m in 2016 – mainly due to the weaker results of two market-leading companies.
Insurers in the region continue to face challenging market conditions brought on by pressure on pricing, overcapacity and regulatory requirements.
“Some of the critical issues facing CEOs today are unchanging, especially in terms of competition and oversupply of products in the market,” said Mr Jason Light, CEO, Emirates Insurance Company. “There’s the eternal quest for product differentiation – how do we make our products more appealing?”
In the retail space, Mr Light said, most of the products the market is ever going to need have already been invented. What insurers need to figure out is how to repackage these existing products for different customer needs and distribute them more efficiently and more attractively through new channels.
Takaful growing but slowly
In the GCC, the net income of listed takaful operators nearly halved in 2017 to $375m, from $674m in 2016, according to S&P. The decline was mainly driven by weaker results in the Saudi Arabian market, which accounts for about 85% of total gross contributions.
Outside Saudi Arabia, the takaful sector in other GCC countries recorded an increase in net income by about 832% to $82m in 2017, from $9m in 2016, and an increase of more than 60% in the first quarter of 2018 compared to the same period in 2017.
Mr Gautam Datta, CEO of National Takaful Company (Watania) said what restricts the growth of takaful is the constant challenge of operators trying to copy the conventional insurance model instead of following the true takaful business model. He said, “Regulators have the tendency to apply the conventional chassis to the takaful framework. This is not right as it leads to a lot of the current mismatches and issues that the takaful industry is facing in terms of the viability of their operations.”
Although risk-based regulations and minimum capital requirements pose significant challenges to many takaful operators, there are some players in the UAE and other GCC countries that are starting to generate profits and creating surpluses. “But there is so much deficit lag,” he said, “that it will be quite a while before takaful operators are able to generate a return on investment (ROI) on par with that of conventional insurance.”
Mr Sam Wakerley, partner, HFW, who was the chairperson at the roundtable, suggested that perhaps lessons could be learned from other jurisdictions where takaful is more developed, such as in Malaysia.
“That’s the only jurisdiction where takaful has been successful,” said Mr Gautam, “and that’s because of the phenomenal amount of government support the sector received in the first 20 to 25 years of its development.” The other success story is the takaful sector in Sudan, he said.
M&A activity to pick up over time
Every year the industry is abuzz with talks of consolidation, and while the global insurance industry was in the grip of takeover fever in 2018, M&A activity has been slow in the UAE, which has “a large number of players relative to the size of the market”, said Mr Wakerley.
Is this going to change in 2019?
“We have 63 companies in the market – including local, regional and international players – but I think the companies are not ready for various reasons,” said Mr Omer Elamin, president, Orient Group. Families and certain institutions own most of the local companies, and some are not prepared to give up control, he said, so the only way to drive M&A is for the regulator to increase the capital. “I want to see the minimum capital requirement increased to between AED300m and AED500m,” he said, adding that he is hoping that the regulator may consider this soon.
Mr Atinc Yilmaz, regional CEO, Howden Turkey, Middle East and Africa (TMEA) agreed that consolidation in the UAE is challenging because of the ownership structure, so the push factor should come from the regulator.
“I think it boils down to what I would call the ‘pain threshold’ – the point when existing shareholders no longer feel motivated to invest in the company and would rather get somebody else to take over,” said Mr Datta. “And I think that’s something that is gradually happening,” he said, pointing out that some of these smaller companies are generating returns on their investment, and as they actively look at more capital investment, consolidation will come naturally.
Making technology more commercially feasible
A topic which generated much discussion – and drew divided views – revolved around technology.
“Obviously technology plays an important role,” said Mr Datta. “It’s changing the way you look at your business model and how you bring about more efficiency. Increasing productivity is obviously the goal.”
Mr Datta pointed out that insurers sit on a lot of data and “we haven’t really been looking at this data closely, analysing it and then adapting our business model to what the data tells us and using the right technology to drive that business model”.
Mr Yilmaz said the challenge with technology is to make it commercially feasible for the industry because “the bottom line is we need to reduce cost and create value for the client”.
The cost of technology is a cause for concern for most, and “the struggle is to get a measurable return on investment”, said Mr Light.
“Technology will notably make us more productive, but technology alone isn’t enough and will not solve everything,” said Mr Jean-Louis Laurent Josi, CEO, Oman Insurance Company. “Some major companies invest billions in technology, but they still haven’t been able to fully leverage these investments. So it’s not easy.”
He added rhetorically, “How many big players have been able to really leverage data for critical underwriting and a better analysis on the behaviour of customers?”
Mr Jack Jenner, CEO, MENA, Allianz Global Corporate & Specialty (AGCS) said, “There are smaller technology advances we can all make. We shouldn’t put InsurTech into just one bucket. There are some elements we can bring in to solve some specific issues that are quite cost effective.”
“We cannot preserve business of the past, and need to be open to the advantages that technology allows for,” said Mr Peter Englund, senior executive officer, head of commercial insurance, Middle East, Zurich Insurance Company. “It is fair to challenge the notion that everything in the tech space is a recipe for success as the investments need to be focused, tailor-made to your business needs, and also reinforce local operations.”
Facing a hardening market
Speaking from a broker’s perspective, Mr Christos Adamantiadis, CEO of Marsh Middle East & Africa said there are some interesting developments happening in the market.
“We see in some cases a hardening market for the first time ever – in fact, for the first time in most underwriters’ lifetime,” he said. “There are some large risks and there are difficulties in placing those risks. It seems we’re shifting very rapidly from a soft market to a hardening market, in terms of rates and capacity.”
We don’t have underwriters and client executives in the region who have ever seen a hardening market, he said.
Mr Elamin agreed. He said, “There are definitely signs of a hardening reinsurance market because of the disappearance of the retrocession market. The reinsurers now have to reduce their capacity. Regrettably our local market is going against the right direction here.”
A number of reinsurers in the region have exited the market – largely due to them being unable to generate sufficient scale and efficiencies within their operations. “Lloyd’s Dubai has lost one underwriting market in 2018,” said Mr Mark Cooper, general representative Middle East and director of Lloyd’s Limited, “and obviously that’s very frustrating.”
He said, “The worry for me is that international reinsurers may lose appetite for the region if they see a struggling market. I think it remains incumbent on all to really get the message across to our clients and customers that they have got to start accepting and pushing rate and for premiums to be paid on time.”
“Credit control as an industry was bad, and then VAT came in and it got horrendous,” said Mr Jenner. “Our credit control and collection positions compared to 12 months ago are significantly worse than they were.”
Mr Laurent Josi said, “You can’t believe the number of cases we are losing because we’re not ready to give one of those extravagant credit terms. It’s happening every day – brokers are pushing for it, customers are pushing for it… As long as the regulator does not step in, we will be asked to play the role of a bank.”
Not all doom and gloom
Despite the challenges faced by the industry in 2018, most participants felt that it’s not all doom and gloom on the horizon.
“We still see some significant growth areas outside the UAE,” said Mr Cooper. “About 60% of our business comes from outside the UAE. There is a significant opportunity for us in the DIFC – we’ve still got a strong Lloyd’s franchise here and the recent improvements we have seen on pricing across many lines have been very encouraging.”
Mr Jenner highlighted a trend that he sees as an opportunity and a “very pleasing development”. He said, “Look at Marsh, Howden and Willis Towers Watson and how their breadth of responsibility has changed quite significantly in the last 12 months. Howden is a growing broker in the region and now they are also covering Turkey. Christos and his team have the added responsibility of covering all of Africa, not just North Africa, while Willis Towers Watson is covering the Middle East and Africa. The hub that we are now servicing is expanding geographically. I see this as an opportunity to build up additional scale, and I’m very optimistic about it.”
“The market fundamentals are still attractive in many ways; insurance penetration is lower in relative terms, governments are spending an increasing amount in infrastructure, and rates are hardening in selected portfolios,” Mr Englund said.
“Some of the technically preferred assets are still oversubscribed, but distressed risks and generically less profitable line of businesses will show hardening rates. This creates opportunities for players who are set up to trade in such conditions. And I think that’s what we should do. We should engage with each other and we should trade – that would create opportunities for us,” Mr Englund said. “I’m bullish about 2019, short- and medium-term,” he added.
“Although there has been some contraction in the facultative market recently, unfortunately it won’t be long before people will see an opportunity where others have exited,” Mr Light said. “I think the UAE domestic market will be tough in 2019. And the reason I’m saying that is because of the clients. They are expecting it to be tough. They know their sectors better than we do.”
Agreeing with Mr Light, Mr Christos said, “I think 2019 will be a difficult year for the UAE, and with the oil price going down, we’re going to see some ripple effects.”
Injecting a dose of optimism, Mr Atinc said, “I see good opportunities in 2019 as well. There is a demand for good quality brokers because of the difficulty in placement and need for creativity under challenging environment for clients. Some large brokers’ consolidation is happening in the region, and that will create opportunities for others. We’re bringing business from Turkey and Africa, and feeding the DIFC platform and regional markets here to support the region. Oil prices remain volatile, which is not easy to predict but many clients have already adjusted their position accordingly, and this is now the new normal in the region. So I think we should be cautiously optimistic about the future of the region, which is one of the emerging growth markets globally, as there is still a lot to achieve here.”
The roundtable discussion was sponsored by HFW. M